Pharma's Big Tradeoff

There is much for pharmaceutical companies to applaud in the new law overhauling the nation's healthcare system. For instance, the goal of providing healthcare benefits to some 32 million uninsured through state-based exchanges and Medicaid greatly expands the market for prescription drugs. Although most states already reimburse, to some extent, for medicines, many of the state Medicaid programs are fairly skimpy. They will now be made more comprehensive.

In addition, insurance market reform—with curbs on denials for pre-existing conditions, as well as on annual and lifetime limits—promises to extend pharmacy benefits to patients with serious or chronic health conditions. Moreover, the scheme to eliminate the contentious "donut hole" in the Medicare drug benefit will help seniors afford high-cost prescriptions.

What's Missing from the Bill

In return, manufacturers will have to pay fees, rebates, and discounts totaling some $105 billion over ten years, according to Avalere Health. That tally is much higher than the $80 billion the Pharmaceutical Research and Manufacturers of America (PhRMA) had negotiated with Senate Finance Committee chairman Max Baucus (D-MT) and the White House. Still, marketers consider it a reasonable tradeoff, as the new law creates an attractive pathway for developing and marketing biosimilars, sets limits on the use of cost-effectiveness research, and also omits several hot-button items that industry strongly opposed (See "What's Missing in the Bill.")

Filling the Hole

Considerable gains will come in the form of greater drug utilization by seniors. Annual wellness visits will produce personal plans recommending immunizations and prescriptions, and annual outreach to low-income beneficiaries will encourage appropriate drug use, plus improved compliance and appeals systems that can facilitate access to needed therapies. The healthcare bill also codifies mandatory Part D coverage of medicines in six protected drug classes, while leaving the door open to future modification.

The biggest change is to close the much-vilified donut hole that now requires seniors to pay the full cost of drugs after spending reaches $2,830 a year. Immediate relief comes from a government rebate of $250 to beneficiaries who fall in the donut hole this year. Beginning in January 2011, manufacturers will cover 50 percent of the negotiated price of brand medicines filled by seniors in the gap. Beneficiaries will pay the reduced price at the pharmacy, and manufacturers will reimburse the difference.

Beginning in 2013, Medicare will begin a campaign to close the donut hole even further by 2020 by phasing in payment for 25 percent of drug expenditures. For generic drugs, Medicare will ramp up coverage of "gap" products, increasing until plans pay 75 percent of the cost in 2020. At that point, policymakers consider the donut hole essentially closed because the remaining 25 percent patient share will be in line with copays on drugs prior to hitting the coverage gap.

Paying Plenty

While these donut hole discounts will cost manufacturers some $32 billion over ten years, the change eliminates a major source of confusion for elderly patients and is slated to boost compliance by the growing number of seniors who stop taking drugs or switch to generics when they hit the gap. Beneficiaries also will move through the donut hole more quickly to catastrophic coverage where Medicare pays 95 percent of drug costs.

To offset the government's $38 billion share for closing the donut hole, manufacturers will pay another $28 billion in new fees over ten years, starting with $2.5 billion in 2011. Total collections will rise to $4 billion in 2017, then drop to $2.8 billion in 2019 and subsequent years. The Treasury Department will apportion yearly fees based on a company's relative share of branded drug sales to Medicare, Medicaid, the Veterans Administration, and Department of Defense healthcare programs. Manufacturers with government sales less than $5 million will get a pass; those with over $400 million a year pay a full share.

Pharma companies also will ante up $38 billion more in Medicaid rebates. The rebate jumps from 15 percent to 23.1 percent of average manufacturer price for brands, and from 11 percent to 13 percent for generics, retroactive to the beginning of 2010. That essentially raises the "best price" on many drugs, opening the door to deeper discounts on drugs sold to private plans. Rebates also extend to new formulations of oral solid dosage forms, and can now be collected by Medicaid managed care organizations—a change that might encourage community health plans to press for additional discounts.